APOLLO ENDOSURGERY, INC.
This quarterly report ("Quarterly Report") contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). These statements involve known and unknown risks, uncertainties and other
factors that may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. In some cases, you can
identify forward-looking statements by terms such as "anticipates," "believes,"
"could," "estimates," "expects," "intends," "may," "plans," "potential,"
"predicts," "projects," "should," "will," "would," and similar expressions
intended to identify forward-looking statements. Forward-looking statements
reflect our current views with respect to future events, are based on
assumptions, and are subject to risks, uncertainties and other important
factors. In particular, statements, whether express or implied, concerning
future operating results or the ability to generate sales, income or cash flow
are forward-looking statements. They involve risks, uncertainties and
assumptions that are beyond our ability to control or predict, including those
discussed in Part II, Item 1A , of this Quarterly Report, such as the
continuing effects of the COVID-19 pandemic on our financial condition and
results of operations. Given these risks, uncertainties and other important
factors, you should not place undue reliance on these forward-looking statements
as predictions of future events. Also, forward-looking statements represent our
estimates and assumptions only as of the date of this Quarterly Report. Except
as required by law, we assume no obligation to update any forward-looking
statements publicly, or to update the reasons actual results could differ
materially from those anticipated in any forward-looking statements, even if new
information becomes available in the future.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and accompanying notes, and our Annual
Report on Form 10-K for the year ended December 31, 201 9 filed on March
26 , 20 20 with the Securities and Exchange Commission
("SEC"). "Apollo,", Orbera®, OverStitch™, the Apollo logo and other trademarks,
service marks and trade names of Apollo are registered and unregistered marks of
Apollo Endosurgery, Inc. in the United States and other jurisdictions.
Overview
We are a medical technology company primarily focused on the design, development
and commercialization of innovative medical devices to advance gastrointestinal
therapeutic endoscopy. We develop and distribute devices that are used by
surgeons and gastroenterologists for a variety of procedures related to
gastrointestinal defect and complication management or bariatric (weight loss)
intervention.
Our core products are the OverStitch Endoscopic Suturing System ("ESS") and
Intragastric Balloon ("IGB") (most often branded as Orbera). In December 2018 ,
we divested our Surgical product line.
We have offices in the United Kingdom and Italy that oversee commercial
activities outside the U.S. and a products manufacturing facility in Costa Rica .
All other activities are managed and operated from facilities in Austin, Texas .
Impact of COVID-19 on Our Business
The recent COVID-19 pandemic has adversely impacted our sales levels, business
operations and results of operations in March 2020 , in particular due to
significantly decreased procedures being performed that use our products across
our markets and the broader economic contraction resulting from the pandemic.
While the ultimate economic impact of the COVID-19 pandemic is highly uncertain,
we expect our sales levels, business operations and results from operations will
continue to be adversely impacted to varying degrees for as long as the COVID-19
pandemic and related reductions in procedures that use our products persist. See
Part II , Item 1A. Risk Factors-Risks Related to Our Business-Our
business has been and will continue to be adversely affected by the ongoing
COVID-19 outbreak .
COVID-19 Response
On March 10, 2020 , the World Health Organization declared that the COVID-19
outbreak had reached pandemic status and a number of countries, particularly
countries in Europe that comprise the majority of our OUS sales and the United
States , implemented a number of public health interventions to reduce the risk
of disease transmission and conserve healthcare resources for addressing the
community health needs of COVID-19. This resulted in an unprecedented decline in
global healthcare resources available to be utilized for elective or deferrable
procedures, including those that use our products. Following sales growth in the
months of January and February that were consistent with management's
pre-COVID-19 expectations, our sales results in the month of March declined
commensurate with the global decline in elective procedures. Patient access to
treatments has been stymied by shelter in place and social distancing rules
resulting in cancellation or postponement of procedures, including those that
use our products. Our sales personnel who deliver in-person customer support and
generate additional business with new customers and facilities are restricted
from accessing our customers for these same reasons.
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Due to the continued business disruptions stemming directly from the COVID-19
pandemic and the resulting international efforts to contain the spread of
COVID-19, we have taken several actions to preserve the Company's liquidity. As
described in Item 9B of our Annual Report on Form 10-K for the year ended
December 31, 2019 filed on March 26, 2020, we reduced 2019 cash bonuses and
implemented reductions in compensation across our workforce. Effective April 20,
2020 , we furloughed 57 U.S. employees and reduced the employment arrangements of
an additional 34 employees outside the United States . While our intention is for
the furlough of employees to be temporary, the adopted furlough program does not
have a specific end date, and we will continue to evaluate business conditions
to determine when to recall individual or groups of furloughed employees. In
addition, we implemented a $100,000 salary cap, effective April 16, 2020 , for
all employees. Our intention is for the reductions in salary to be temporary;
however, the duration of the salary reductions is indefinite due to the
uncertain duration of the current COVID-19 business disruption.
The objective of the above cost reduction actions is to preserve liquidity with
the goal of completing the second quarter of 2020 with the same cash on hand
that we were expecting prior to the COVID-19 outbreak. In addition, we have
maintained an ability to deliver essential customer support and continue to
invest in critical growth projects including the ongoing MERIT trial and other
reimbursement initiatives, the development of our new lower GI suturing product,
and select projects focused on improving parts of our supply chain.
On April 27, 2020 , the Company was granted a Loan of $2.8 million under the
Small Business Administration's PPP established under the CARES Act. The Loan
matures on April 27, 2022 and bears interest at a rate of 1.0% per annum with
equal interest and principal payments beginning on November 27, 2020 .
Divestiture of the Surgical Product Line
In December 2018 , we entered into an Asset Purchase Agreement and sold our
Surgical product line to ReShape Lifesciences Inc. ("ReShape"). Our goal with
this transaction was to increase our focus on our Endoscopy products and
monetize a non-strategic asset.
ReShape agreed to pay $17.0 million in cash, of which $10.0 million was paid at
the closing of the transaction, $2.0 million was paid on the first anniversary
of the closing date and $2.0 million and $3.0 million remains payable on each of
the second and third anniversaries of the closing date, respectively.
Upon completion of the ReShape transaction, the parties entered into a
transition services agreement, supply agreement and distribution agreements. All
transition and distribution services were completed as of December 31, 2019 . We
remain obligated to perform manufacturing services through December 2020 .
Financial Operations Overview
Revenues
Our principal source of revenues are sales of our Endoscopy products. The
majority of our sales come from direct markets where sales are made to the final
end customers, typically healthcare providers. In other markets, we sell our
products to distributors who resell our products to end users. Revenues between
periods will be impacted by several factors, including the continuing COVID-19
pandemic, physician procedures and therapy preferences, patient procedures and
therapy preferences, other market trends, the stability of the average sales
price we realize on products and changes in foreign exchange rates used to
translate foreign currency denominated sales into U.S. dollars.
Under the ReShape distribution agreement, we agreed to sell Surgical products to
customers OUS up to one year. Product sales in 2019 include sales in these
serviced markets.
Other revenue includes amounts recognized for our digital aftercare support
program, transition and supply services we rendered to ReShape and freight
charged to customers.
Cost of Sales
Our ESS products, representing the majority of our Endoscopy product sales, have
historically been purchased from third-party manufacturers, and our cost of
sales for these products has consisted of the actual purchase price from these
manufacturers plus an allocation of our internal overhead cost. Cost of sales
for products which we manufacture includes raw materials, labor, and
manufacturing overhead. Raw materials used in our manufacturing activity are
generally not subject to substantial commodity price volatility, and most of our
manufacturing costs are incurred in U.S. dollars. Cost of sales also includes
excess and obsolete inventory charges, royalties, shipping, inspection and
related costs incurred in making our products available for sale or use.
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Our gross margin comparability between periods has been impacted by the shift in
our revenue mix from Surgical to Endoscopy products. Our divested Surgical
products historically have higher gross margins compared to our Endoscopy
products. In addition, manufacturing overhead as a percentage of revenue between
periods can fluctuate as a result of manufacturing rates and the degree to which
manufacturing overhead is allocated to production during the period.
Comparability of cost of sales and gross margin between periods could also be
affected by changes in inventory valuation allowances related to obsolete or
excess inventory. We expect to improve gross margins as we complete certain
identified gross margin improvement projects and improve capacity utilization of
our manufacturing facility.
Sales and Marketing Expense
Sales and marketing expense primarily consists of salaries, commissions,
benefits and other related costs, including stock-based compensation, for
personnel employed in our sales, marketing and medical education departments. In
addition, our sales and marketing expense includes costs associated with
advertising, physician training, industry events and other promotional
activities.
General and Administrative Expense
General and administrative expense primarily consists of salaries, benefits and
other related costs, including stock-based compensation, for personnel employed
in the corporate management, finance, legal, compliance, information technology
and human resource departments. General and administrative expense also includes
facilities cost, insurance, audit fees, legal fees, bad debt expense and costs
to develop and maintain our intellectual property portfolio.
Research and Development Expense
Research and development expense includes product development, clinical trial
costs, quality and regulatory compliance, consulting services, outside
prototyping services, outside research activities, materials, depreciation and
other costs associated with development of our products. Research and
development expense also includes compensation and stock-based compensation
expense for personnel dedicated to these activities. Research and development
expense may fluctuate between periods depending on the activity associated with
our various product development and clinical obligations.
Amortization of Intangible Assets
Definite-lived intangible assets primarily consist of customer relationships,
product technology, trade names, patents and trademarks and capitalized
software. Intangible assets are amortized over the asset's estimated useful
life.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures is in conformity
with U.S. generally accepted accounting principles and the Company's discussion
and analysis of its financial condition and operating results require the
Company's management to make judgments, assumptions and estimates that affect
the amounts reported in its condensed consolidated financial statements and
accompanying notes. Management bases its estimates on historical evidence and on
various other assumptions it believes to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities. Actual results may differ from these
estimates, and such differences may be material.
Note 2, "Significant Accounting Policies" in Part I, Item 1 of this Form
10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of
the Company's Annual Report on Form 10-K for the year ended December 31,
201 9 (the "2019 Form 10-K"), and "Critical Accounting Policies and
Estimates" in Part II, Item 7 of the 2019 Form 10-K describe the significant
accounting policies and methods used in the preparation of the Company's
condensed consolidated financial statements. There have been no material changes
to the Company's critical accounting policies and estimates since the 2019 Form
10-K.
Non-GAAP Financial Measures
To supplement our financial results we are providing a non-GAAP financial
measure, Endoscopy product sales percentage change in constant currency, which
removes the impact of changes in foreign currency exchange rates that affect the
comparability and trend of our Endoscopy product sales. Endoscopy product sales
percentage change in constant currency is calculated by translating current
foreign currency sales using last year's exchange rate. This supplemental
measure of our performance is not required by, and is not determined in
accordance with GAAP.
We believe the non-GAAP financial measure included herein is helpful in
understanding our current financial performance. We use this supplemental
non-GAAP financial measure internally to understand, manage and evaluate our
business, and make operating decisions. We believe that making non-GAAP
financial information available to investors, in addition to GAAP financial
information, may facilitate more consistent comparisons between the company's
performance over time with the performance of other companies in the medical
device industry, which may use similar financial measures to supplement their
GAAP financial information. However, our non-GAAP financial measure is not meant
to be considered in isolation or as a substitute for the comparable GAAP metric.
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Results of Operations
Comparison of the three months ended March 31, 2020 and 2019
Three Months Ended Three Months Ended
March 31, 2020 March 31, 2019
Dollars % of Revenues Dollars % of Revenues
Revenues (1) $ 10,718 100.0 % $ 13,211 100.0 %
Cost of sales 5,081 47.4 % 5,970 45.2 %
Gross margin 5,637 52.6 % 7,241 54.8 %
Operating expenses:
Sales and marketing 6,330 59.1 % 7,697 58.3 %
General and administrative 3,339 31.2 % 3,717 28.1 %
Research and development 2,147 20.0 % 3,428 25.9 %
Amortization of intangible assets 496 4.6 % 553 4.2 %
Settlement gain - - % (5,609) (42.5) %
Total operating expenses 12,312 114.9 % 9,786 74.0 %
Loss from operations (6,675) (62.3) % (2,545) (19.2) %
Interest expense, net 1,244 11.6 % 959 7.3 %
Other expense (income), net 2,294 21.4 % (751) (5.7) %
Net loss before income taxes (10,213) (95.3) % (2,753) (20.8) %
Income tax expense 43 0.4 % 51 0.4 %
Net loss $ (10,256) (95.7) % $ (2,804) (21.2) %
(1) Revenue between periods declined $2.1 million due to the divestiture of the
Surgical product line in December 2018 . See the product sales table under
"Revenues" for additional information for product group and geographic market.
Revenues
Product sales by product group and geographic market for the periods shown were
as follows:
Three Months Ended Three Months Ended
March 31, 2020 March 31, 2019 % Increase/ (Decrease)
U.S. OUS Total Revenues U.S. OUS Total Revenues U.S. OUS Total Revenues
ESS $ 3,755 $ 3,077 $ 6,832 $ 3,007 $ 3,491 $ 6,498 24.9 % (11.9) % 5.1 %
IGB 898 2,628 3,526 1,459 2,863 4,322 (38.5) % (8.2) % (18.4) %
Total Endoscopy 4,653 5,705 10,358 4,466 6,354 10,820 4.2 % (10.2) % (4.3) %
Surgical - - - - 1,700 1,700 - % (100.0) % (100.0) %
Other (1) 327 33 360 683 8 691 (52.1) % 312.5 % (47.9) %Total revenues$ 4,980 $ 5,738 $ 10,718 $ 5,149 $ 8,062 $ 13,211 (3.3) % (28.8) % (18.9) % % Total revenues 46.5 % 53.5 % 39.0 % 61.0 % (1) OtherU.S. revenue includes$0.2 million and$0.6 million of transition and manufacturing services provided to ReShape for the three months endedMarch 31, 2020 and 2019, respectively. 16 -------------------------------------------------------------------------------- Endoscopy product sales percentage change in constant currency were as follows: Three Months Ended March 31, 2020 % Increase/Decrease in Constant Currency OUS Total Revenues ESS (7.5) % 7.5 % IGB (5.2) % (16.4) % Total Endoscopy (6.5) % (2.1) % Total revenues for the three months endedMarch 31, 2020 were$10.7 million , compared to$13.2 million for the three months endedMarch 31, 2019 , a decrease of 18.9%. Of the decline in total revenues, 83.5% was due to the reduction in Surgical product sales following our divestiture of this product line. The remaining decline in revenues in the three months endedMarch 31, 2020 was due to the impact of the COVID-19 pandemic. Following sales growth in the months of January and February that were consistent with management's pre-COVID-19 expectations, our sales results in the month of March declined commensurate with the global decline in elective procedures. Total Endoscopy product sales decreased$0.5 million , or 4.3%, for the three months endedMarch 31, 2020 from$10.8 million in the same period of 2019. In constant currency, total Endoscopy sales decreased 2.1% for the three months endedMarch 31, 2020 . Direct market Endoscopy product sales accounted for approximately 81.2% of total Endoscopy product sales for the three months endedMarch 31, 2020 , compared to 80.7% for the same period of 2019. Total ESS product sales increased$0.3 million , or 5.1%, for the three months endedMarch 31, 2020 , when compared to the same period of 2019. In constant currency, total ESS product sales increased 7.5% for the three months endedMarch 31, 2020 . Despite the impact of COVID-19 inMarch 2020 ,U.S. ESS product sales increased$0.7 million , or 24.9% for the three months endedMarch 31, 2020 , when compared to the same period in 2019, primarily due to increased sales volume from new user adoption and greater product utilization in our existing customer base. OUS ESS product sales decreased$0.4 million , or 11.9%, for the three months endedMarch 31, 2020 when compared to the same period of 2019. In constant currency, OUS ESS product sales decreased 7.5% for the three months endedMarch 31, 2020 when compared to the same period of 2019. OUS direct market ESS sales, excludingBrazil , increased 11.1% (14.5% in constant currency) compared to the same period in 2019. In early March of 2020, we entered into a distributor agreement with a third party medical device distribution company and ceased our direct sales operations inBrazil . Overall in the three months endedMarch 31, 2020 , ESS product sales to OUS distributor orders originally scheduled to ship in March were deferred due to distributor concerns of how COVID-19 will affect procedure demand in their respective country of operation. As a result, sales to distributors in the three months endedMarch 31, 2020 were lower than in the same period of 2019. Total IGB product sales decreased$0.8 million , or 18.4%, for the three months endedMarch 31, 2020 , when compared to the same period of 2019.U.S. IGB product sales decreased$0.6 million , or 38.5%, while OUS IGB product sales decreased$0.2 million , or 8.2%, for the three months endedMarch 31, 2020 , when compared to the same period in 2019. In constant currency, OUS IGB product sales decreased 5.2%, primarily due to the impact of the COVID-19 pandemic in our direct markets and its resulting decrease in consumer demand. OUS distributor IGB sales, excludingBrazil , increased 31.7% compared to the same period in 2019, as most expected IGB distributor orders were fulfilled earlier in the three months endedMarch 31, 2020 prior to the COVID-19 outbreak. Included in other revenues for the three months endedMarch 31, 2020 and 2019 is$0.2 million and$0.6 million of transition and manufacturing services provided to ReShape, respectively. We remain obligated to perform manufacturing services throughDecember 2020 . 17 -------------------------------------------------------------------------------- Cost of Sales Costs of product sales for the periods shown were as follows: Three Months Ended Three Months Ended March 31, 2020 March 31, 2019 Dollars % Total Revenues Dollars % Total Revenues Materials, labor and purchased goods$ 3,373 31.5 %$ 3,653 27.6 % Overhead 1,139 10.6 % 1,515 11.5 % Other indirect costs 569 5.3 % 802 6.1 % Total cost of sales$ 5,081 47.4 %$ 5,970 45.2 % Gross Margin Gross margin was 52.6% for the three months endedMarch 31, 2020 , compared to 54.8% for the same period of 2019. The decline in gross margin is primarily due to cessation of Surgical product sales. Gross margin for our Endoscopy products was 51.9% for the three months endedMarch 31, 2020 compared to 50.7% for the same period of 2019, respectively, due to the implementation of a portion of our gross margin improvement projects offset partially by declining IGB sales. Operating Expenses Sales and Marketing Expense. Sales and marketing expense decreased$1.4 million for the three months endedMarch 31, 2020 compared to the same period in 2019, primarily due to lowerU.S. direct consumer advertising costs, and lower sales compensation and travel due to the impact of the COVID-19 pandemic. General and Administrative Expense. General and administrative expense decreased$0.4 million for the three months endedMarch 31, 2020 when compared to the same period of 2019, primarily due to lower audit fees. Research and Development Expense. Research and development expense decreased$1.3 million for the three months endedMarch 31, 2020 when compared to the same period for 2019, primarily due to lower clinical trial costs as enrollment milestones were achieved for clinical studies that we are funding. Amortization of Intangible Assets. Amortization of intangible assets decreased$0.1 million for the three months endedMarch 31, 2020 compared to the same period in 2019. Settlement gain. Settlement gain of$5.6 million for the three months endedMarch 31, 2019 resulted from the resolution of a dispute withAllergan Inc. related to amounts previously charged for inventory purchases and transition services provided through 2016. Loss from Operations Loss from operations for the three months endedMarch 31, 2020 was$6.7 million compared to$2.5 million for the three months endedMarch 31, 2019 . Excluding the settlement gain recorded in the three months endedMarch 31, 2019 of$5.6 million , our loss from operations decreased by$1.5 million , or 18.1% in the three months endedMarch 31, 2020 on lower operating expenses offset in part by the reduction in gross margin following the completion of our distribution services obligations following the divestiture of our Surgical product line and the impact of COVID-19 on our Endoscopy product sales. Other Expenses Interest Expense, net. Net interest expense increased by$0.3 million for the three months endedMarch 31, 2020 when compared to the same period in 2019 primarily due to non-cash interest on the Convertible Debt. Other Expense (Income), net. Other expense (income) primarily consists of realized and unrealized foreign exchange gains or losses. The increase of$3.0 million in comparing the three months endedMarch 31, 2020 to the same period in 2019 was primarily caused by the movement in exchange rates on short-term intercompany loans denominated inU.S. dollars payable by our foreign subsidiaries. During the three months endedMarch 31, 2020 , unrealized exchange rate losses on these intercompany loans were$2.2 million compared to unrealized gains of$0.9 million for the same period in 2019. 18 -------------------------------------------------------------------------------- Liquidity and Capital Resources We have experienced operating losses since inception and occasional debt covenant violations and have an accumulated deficit of$260.4 million as ofMarch 31, 2020 . To date, we have funded our operating losses and acquisitions through equity offerings and the issuance of debt instruments. Our ability to fund future operations and meet debt covenant requirements will depend upon our level of future revenue and operating cash flow and our ability to access additional funding through either equity offerings, issuances of debt instruments or both. We expect our negative cash flows from operating activities to continue. The reduction in our sales due to the COVID-19 pandemic and uncertainty over how long the COVID-19 impact on our business will last, along with our existing capital resources, has raised substantial doubt about our ability to continue as a going concern within one year of the issuance date of these condensed consolidated financial statements. We will likely require additional funding in order to meet our covenant requirements. In this regard, management's plans include, but are not limited to, sales of our common stock, preferred stock, convertible debt securities or debt financings, reduction of planned expenditures, and other sources. There are no assurances that such additional funding will be obtained, the degree or duration that the COVID-19 pandemic will negatively have on our business, or that we will succeed in our future operations. If we cannot successfully raise additional capital and implement our business plan, our liquidity, financial condition and business prospects will be materially and adversely affected. As ofMarch 31, 2020 , cash, cash equivalents, and restricted cash was$24.0 million . Term Loan Facility InMarch 2019 , we entered into a term loan facility agreement with Solar Capital, Ltd. to borrow$35.0 million (the "Credit Agreement"). The Credit Agreement matures onSeptember 1, 2023 , with principal payments beginning inMarch 2021 , and bears interest at the greater of LIBOR or 1.35575%, plus 7.5%. Interest only is payable in arrears untilMarch 1, 2021 (orJuly 1, 2021 if certain revenue milestones are achieved). Principal payments are due on a straight-line basis after the interest-only period concludes. An additional 4.9% of the outstanding amount will be due at end of the loan term and an additional 4.5% fee of the Term Loan funded amount will be due at the earlier of an Exit Event (as defined in the Credit Agreement) or if we achieve trailing twelve-month revenue of$100.0 million beforeMarch 15, 2029 . The Credit Agreement provides that we may borrow an additional$5.0 million upon our request, subject to further credit approval. The Credit Agreement includes the customary affirmative covenants, negative covenants and financial covenants, including a minimum liquidity requirement and minimum product revenues. We used$22.4 million of the proceeds of the Credit Agreement to repay our previous senior secured credit agreement in full, including interest. InMarch 2020 , we entered into the Fourth Amendment and Limited Waiver to the Credit Agreement which (i) established the trailing six-month Endoscopy revenue requirements for 2020, (ii) will provide an additional$10.0 million of funding upon the achievement of these revenue requirements throughJune 2020 , (iii) extended the interest-only period untilJuly 1, 2021 , if certain revenue milestones are achieved, (iv) requires that we raise$15.0 million of additional cash from debt or equity financing byAugust 2020 , (v) established a minimum LIBOR interest rate, and (vi) and waived the financial statement covenant default associated with the going concern opinion of our independent registered public accounting firm for the year endedDecember 31, 2019 . Due to the negative impact of COVID-19 on our revenues, we will unlikely be eligible to access the$10,000 of additional funding under the Fourth Amendment. InApril 2020 , we entered into the Fifth Amendment and Limited Waiver to the Credit Agreement. See Note 15 , " Subsequent Events " in Part I, Item 1 of this Form 10-Q . The Credit Agreement is classified as a current liability on the balance sheet as ofMarch 31, 2020 , based on our assessment that we may not be able to meet our debt covenant requirements for at least one year from the issuance of our condensed consolidated financial statements considering factors such as the uncertainties from the COVID-19 pandemic. Should we fall short of the target, we would seek a waiver of this provision. There can be no assurances that we would be successful in obtaining a waiver. Convertible Senior Debt InAugust 2019 , we issued$20.0 million aggregate principal amount of Convertible Debt. Interest on the Convertible Debt will be payable semi-annually in shares of our common stock onJanuary 1 andJuly 1 of each year, beginning onJanuary 1, 2020 , at a rate of 6.0% per year. The number of shares of common stock required to settle the amount of interest payable will be based on the volume-weighted average price ("VWAP"), of our common stock for the 10 consecutive trading days immediately preceding the applicable interest payment date. The Convertible Debt will mature onAugust 12, 2024 unless earlier converted or repurchased in accordance with its terms. The Convertible Debt converts, at the option of the holders, into shares of our common stock at an initial conversion price of$3.25 per share, subject to adjustment. If the VWAP of our common stock has been at least$9.75 (subject to adjustment) for at least 20 trading days during any 30 consecutive trading day period, we may force the conversion of all or any part of the outstanding principal amount of the Convertible Debt, accrued and unpaid interest and any other amounts then owing, subject to certain conditions. 19 -------------------------------------------------------------------------------- CARES Act OnMarch 27, 2020 , the CARES Act was signed into law providing certain economic aid packages for small businesses. InApril 2020 , we were granted a loan of$2.8 million under the PPP established under the CARES Act. The Loan matures onApril 27, 2022 and bears interest at a rate of 1.0% per annum with equal interest and principal payments beginning onNovember 27, 2020 . Cash Flows The following table provides information regarding our cash flows:
Three Months Ended
2020 2019
Net cash used in operating activities $ (6,263) $ (6,062)
Net cash used in investing activities (318) (177)
Net cash (used in) provided by financing activities (206) 12,206
Effect of exchange rate changes on cash (95) 18
Net change in cash, cash equivalents and restricted cash $
(6,882)
Operating Activities Cash used in operating activities of$6.3 million for the three months endedMarch 31, 2020 was primarily the result of a net loss of$10.3 million offset by non-cash items of$4.2 million , primarily related to depreciation, amortization, foreign currency on intercompany loans, non-cash interest, and stock based compensation. Net loss, after adjustment for non-cash items, improved$1.5 million compared to the same period in 2019 due to lower operating expenses which offset reduced gross margin resulting from the divestiture of the Surgical product line. Cash used in operating activities of$6.1 million for the three months endedMarch 31, 2019 was primarily the result of a net loss of$2.8 million plus non-cash items of$4.8 million primarily related to the settlement gain of$5.6 million , depreciation, amortization, foreign currency on intercompany loans, and stock based compensation. Additionally, cash provided by operating assets and liabilities of$1.6 million related to working capital changes primarily related to accounts receivable, accounts payable and accrued liabilities. Investing Activities Cash used in investing activities of$0.3 million for the three months endedMarch 31, 2020 and$0.2 million for the three months endedMarch 31, 2019 were primarily related to equipment purchases associated with our product development and gross margin improvement projects, as well as ongoing investments in our intellectual property portfolio. Financing Activities Cash used in financing activities of$0.2 million for the three months endedMarch 31, 2020 was related to the payment of financing costs associated with the Fourth Amendment to our Credit Agreement. Cash provided by financing activities of$12.2 million for the three months endedMarch 31, 2019 was primarily related to the net proceeds received from the Term Loan Facility refinancing. Future Funding Requirements As ofMarch 31, 2020 , we had cash, cash equivalents and restricted cash balances totaling$24.0 million . We cannot be certain that our existing cash and cash equivalents will continue to be adequate to fund our operations, or that additional financing will be available when needed, or that, if available, financing will be obtained on terms favorable to us or our stockholders. If we raise additional funds by issuing equity or convertible securities, substantial dilution to existing stockholders will likely result. If we raise additional funds by incurring new debt obligations, the terms of the debt will likely require significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business. As discussed in Note 1 of the n otes to the c ondensed c onsolidated f inancial s tatements , conditions or events have raised substantial doubt about our ability to continue as a going concern. Off-balance Sheet Arrangements We do not have any off-balance sheet arrangements as defined by rules enacted by theSEC and accordingly, no such arrangements are likely to have a current or future effect on our financial position. 20 -------------------------------------------------------------------------------- Recent Accounting Pronouncements See Note 2( c ) to the c ondensed c onsolidated
f inancial s tatements in Part I, Item 1 of this Quarterly Report for a discussion of recently enacted accounting pronouncements.
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